Too many personal finance bloggers need to sharpen their game when it comes to bankruptcy.
Personal finance bloggers do so much good promoting better financial habits and deeper understanding of money.
But too often they drop the ball when it comes to bankruptcy.
One, they get the basic facts about bankruptcy wrong; and
Two, they categorically make bankruptcy the last choice for relief, rather than an option to consider along side alternatives.
So, instead of blogs shedding light on bankruptcy as a personal finance tool, myths and misconceptions get recirculated.
So, here are 10 things a 40 year bankruptcy law veteran wishes personal finance writers would get right.
1. Debtors lose nothing in 97% of bankruptcy cases
While Chapter 7 is termed a liquidation proceeding, in fact very few individual debtors have any property liquidated. That’s because exemptions laws that protect certain assets from creditor’s claims. Note that exemptions vary from state to state. Further, most personal property has little sale value.
2. Debtors with assets can keep everything through Chapter 13
Debtors with assets at risk in Chapter 7 can choose a Chapter 13 bankruptcy where they propose a payment plan that must give creditors what those assets would yield in Chapter 7. Debtors keep their assets throughout, and emerge with a discharge of debts.
3. Means test affects only choice of chapter, not availability of relief
The means test does not bar anyone from bankruptcy. It is a flawed attempt to see that high income individuals justify their choice of Chapter 7, or elect a repayment plan through Chapter 13. That repayment plan may still only pay creditors a fraction of their claims.
4. Credit scores improve immediately after bankruptcy
Long term studies show that, far from trashing credit scores, bankruptcy fuels an increase in credit scores, pushing scores immediately and steadily upward. The fact of filing appears in credit reports for 7-10 years (depending on chapter) but becomes less and less significant over time.
5. Even those in bankruptcy can get loans
Filing bankruptcy affects the price of credit; it is not an absolute bar to getting a loan. In fact, debtors in Chapter 13 get car loans during their cases. The terms aren’t great, but bankruptcy filers are not locked out of the credit market.
6. Stress is deadly
The toll of money-driven stress on individuals and families is incalculable. Stress not only degrades health, but leads to fuzzy thinking about all kinds of subjects. While repayment schemes drag on, bankruptcy relief can immediately alleviate that pernicious stress.
7. No one rule fits all
The suitability of bankruptcy as a remedy for debt is highly individual. There’s no one formula or check list that applies to everyone with debts they can’t pay. Age, family size, retirement resources, income level and debt total are all factors that should influence the decision to file bankruptcy. Each factor cuts in a unique direction.
8. Bankruptcy enables payment of debts that aren’t discharged
A slice of debts can’t be discharged in bankruptcy. Too many writers lead with the list of debts that can’t be wiped out. They omit that by using bankruptcy to get rid of the dischargeable debts, an individual can free up funds to pay those important debts that survive a discharge.
9. Bankruptcy effects a debtor-creditor power shift
Bankruptcy provides a different playbook for the debtor/creditor relationship. No longer does the threat of legal action empower the aggressive creditor. The law provides for the order in which creditor claims are paid (if paid at all) and a federal judge enforces the automatic stay that halts collection action. All creditors are bound by bankruptcy law so hold out creditors can’t wreck a repayment plan.
10. Bankruptcy benefits the economy
Even when the Constitution was written, lawmakers recognized the benefits to all of us from freeing people from debts they couldn’t pay. The Founders provided that Congress would enact uniform bankruptcy laws. Allowing the discharge of old debts allows families to participate in the economic life of the country going forward. It makes it more likely families are economically resilient and positioned for old age. And it allows business people to take risks and try new things, knowing it won’t ruin the balance of their lives.
Bankruptcy is not the last resort
Bankruptcy offers a swift and certain remedy for overwhelming debt. The biggest tragedy I see in my law practice is people who struggle far too long with debt remedies that are doomed from the beginning.
Bankruptcy is an option to be considered alongside other debt options, from the beginning.
While bankruptcy is not to be used lightly, it is not a last resort.